# CHAINRUP SAMPATRAM v. COMMISSIONER OF INCOME-TAX

- **Citation:** [1954] 1 S.C.R. 211
- **Court:** Supreme Court of India
- **Decided:** 1954
- **Case number:** Civil Appeal No. 142 of 1952
- **Bench:** PATANJALI SAsTRI C. J, S. R. DAs, VIVIAN BosE, Ghulam Hasan, Bhagwati
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/chainrup-sampatram-v-commissioner-of-income-tax-255
- **Pages:** 8

## Headnote

Indian Income-tax Act (XI of 1922), ss. 4(1)(b) and 14(~)(c)
Ascertainment of profit by valuation of stock-Stock-in-trade removed
to Native State-·Place where profit accrnes-Exemption itnder s. 14
(2) (c)-Principles underlying vali;ation of stock.
The assessee firm which carried on business at Calcutta in bullion
despatched during the accounting year to Bikaner, where its partners resided, a certain quantity of silver bars and showed them as
having been sold to the partners. The Income-tax authorities
disbelieved the story oi' the sale and, treating the bars as stock-intrade and valuing them at their market value at the close of the
year which was much higher than the cost, assessed the firm's
profits at Rs. 2,20,887.
The assessee contended that, even admitting that the bars were the stock-in-trade of the business, the
increased value at the close of the year accrued at Bikaner and was
exempt from tax in British India under s. 14(2)(c) of the Incometax Act.
The High Court held that the notional profit representing
the appreciation in value of the stock-in-trade emerged out of the
valuation and the profit accordingly arose at the time when, and at
the place where, the valuation was made, and as the valuation was
made at Calcutta s. 14(2)(c) did not apply and the profit was taxable,
On appeal,
19:;3
Cornrnissioner of
lnconze-tax,
Bombay City
v.
The Oentur!I
Spinning and
JI[ anitfacturing
Go. Ltd.
19:;3
Oct. 9.
212
SUPREME COURT REPORTS
(1954]
1963
Held, that the view ol the High Court that the profit arose out
of the valuation of the closing stock and the situs of its accrual or
Ohciinrup
arising was therefore where the valuation was made, Wfl.iS erroneous.
Sainpatrani
The conclusion of the IIigh Court that the profit did not accrue in
.v..
Bikaner but at Calcutta could, ho~.vever, be supported on another
Coni11iiss1oner of ground, viz., that the source of the pro.fit was the business and as
lncome-taa:,
the profit could be correctly ascertained according to the method
West Bengal.
adopteci by the assessee only after bringing into the trading account
his closing stock wherever it may exist, the 'vhole of the profits
must be taken to accrue or arise at the place of carrying on the
hnsiness, viz., Calcutta.
The principles underlying the method of ascerhaining profits
by valuation of stock at the beginning and close of the year and of
the rule that the closing stock is to be valued at cost or market
value, \vhichever is the lo1ver; explained.
Whimster and Co. v. Commissioners of Inland Revenue (12
Tax Oas. 813) and Commissioner of Income-tax, Madras v. Chenga/.
varaya Chetty (I.f,.R, 48 Mad. 836) referred to.
CrvrL
APPELLATE
JURISDICTION
Civil
Appeal
No. 142 of 1952.
Appeal by special leave granted by the Supreme
Court by its order dated the 14th March, l!l52, from
the Judgment and Order dated the 4th day of June,
1951, of the High Court of Judicature at Calcutta
(Chakravartti and Das Gupta JJ.) Special Jurisdiction
(Income-tax) in I.T.R. Nos. 7 and 6 of 1947 arising
out of the Order dated the 26th day of March, 1946, of
the Income-tax Appellate Tribunal, Calcutta Bench, in
66 R.A. No. 3 Bengal 1946-47 and 66 R.A. No. 4
Bengal 1946-4 7.
N. 0. Ohattei:jee (8. N. M1tkhe1:ji, with him) for the
appellant.
0. K. Daphtary, 8olicitor-General for India (G. N .
.! oshi, with him) for the respondent.
1953. October 9. The Judgment of the Court. waR
delivered by
·l •
i .•
PA1'AN.TALI SASTRI C. J.-This is an appeal by special
leave from a judgment oft.he High Court of Judicature
at Calcutta answering a reference by the Inconie-tax
Appellate Tribunal under section 66 ( 2) of the Indian
Income-tax Act, 1922, hereinafter referred to as "the
~~
Act".
•
It
S.C.R.
SUPREME COURT REPORTS
213
The appellant is a registered firm consisting of two
1958
brothers as partners with equal shares. The firm was
Ohainrup
carrying on business at Calcutta as bullion merchants
Sampatram
dealing mainly in silver and kept its books of account
v.
on the mercantile basi

## Text

•
S.C.R.
SUPREME COURT REPORTS
211
High Court held that the profits for three months from
the 1st January, 1946, to the 1st April, 1946, were not
reserves which would attract the application of rule 2
of Schedule II. With this conclusion we agree.
The
assessee's appeal is, therefore, dismissed with costs.
Appeal No. 157 allowed.
Appeal No. 158 dismissed.
Agent for the
Rajadhyaksha.
Commissioner of Income-tax:
Agent for the company: I. N. Shroff.
CHAINRUP SAMPATRAM
v.
COMMISSIONER OF INCOME-TAX,
WEST BENGAL.
G.H.
[PATANJALI SAsTRI C. J., S. R. DAs, VIVIAN BosE,
GHULAM HASAN and BHAGWATI JJ.]
Indian Income-tax Act (XI of 1922), ss. 4(1)(b) and 14(~)(c)
Ascertainment of profit by valuation of stock-Stock-in-trade removed
to Native State-·Place where profit accrnes-Exemption itnder s. 14
(2) (c)-Principles underlying vali;ation of stock.
The assessee firm which carried on business at Calcutta in bullion
despatched during the accounting year to Bikaner, where its partners resided, a certain quantity of silver bars and showed them as
having been sold to the partners. The Income-tax authorities
disbelieved the story oi' the sale and, treating the bars as stock-intrade and valuing them at their market value at the close of the
year which was much higher than the cost, assessed the firm's
profits at Rs. 2,20,887.
The assessee contended that, even admitting that the bars were the stock-in-trade of the business, the
increased value at the close of the year accrued at Bikaner and was
exempt from tax in British India under s. 14(2)(c) of the Incometax Act.
The High Court held that the notional profit representing
the appreciation in value of the stock-in-trade emerged out of the
valuation and the profit accordingly arose at the time when, and at
the place where, the valuation was made, and as the valuation was
made at Calcutta s. 14(2)(c) did not apply and the profit was taxable,
On appeal,
19:;3
Cornrnissioner of
lnconze-tax,
Bombay City
v.
The Oentur!I
Spinning and
JI[ anitfacturing
Go. Ltd.
19:;3
Oct. 9.
212
SUPREME COURT REPORTS
(1954]
1963
Held, that the view ol the High Court that the profit arose out
of the valuation of the closing stock and the situs of its accrual or
Ohciinrup
arising was therefore where the valuation was made, Wfl.iS erroneous.
Sainpatrani
The conclusion of the IIigh Court that the profit did not accrue in
.v..
Bikaner but at Calcutta could, ho~.vever, be supported on another
Coni11iiss1oner of ground, viz., that the source of the pro.fit was the business and as
lncome-taa:,
the profit could be correctly ascertained according to the method
West Bengal.
adopteci by the assessee only after bringing into the trading account
his closing stock wherever it may exist, the 'vhole of the profits
must be taken to accrue or arise at the place of carrying on the
hnsiness, viz., Calcutta.
The principles underlying the method of ascerhaining profits
by valuation of stock at the beginning and close of the year and of
the rule that the closing stock is to be valued at cost or market
value, \vhichever is the lo1ver; explained.
Whimster and Co. v. Commissioners of Inland Revenue (12
Tax Oas. 813) and Commissioner of Income-tax, Madras v. Chenga/.
varaya Chetty (I.f,.R, 48 Mad. 836) referred to.
CrvrL
APPELLATE
JURISDICTION
Civil
Appeal
No. 142 of 1952.
Appeal by special leave granted by the Supreme
Court by its order dated the 14th March, l!l52, from
the Judgment and Order dated the 4th day of June,
1951, of the High Court of Judicature at Calcutta
(Chakravartti and Das Gupta JJ.) Special Jurisdiction
(Income-tax) in I.T.R. Nos. 7 and 6 of 1947 arising
out of the Order dated the 26th day of March, 1946, of
the Income-tax Appellate Tribunal, Calcutta Bench, in
66 R.A. No. 3 Bengal 1946-47 and 66 R.A. No. 4
Bengal 1946-4 7.
N. 0. Ohattei:jee (8. N. M1tkhe1:ji, with him) for the
appellant.
0. K. Daphtary, 8olicitor-General for India (G. N .
.! oshi, with him) for the respondent.
1953. October 9. The Judgment of the Court. waR
delivered by
·l •
i .•
PA1'AN.TALI SASTRI C. J.-This is an appeal by special
leave from a judgment oft.he High Court of Judicature
at Calcutta answering a reference by the Inconie-tax
Appellate Tribunal under section 66 ( 2) of the Indian
Income-tax Act, 1922, hereinafter referred to as "the
~~
Act".
•
It
S.C.R.
SUPREME COURT REPORTS
213
The appellant is a registered firm consisting of two
1958
brothers as partners with equal shares. The firm was
Ohainrup
carrying on business at Calcutta as bullion merchants
Sampatram
dealing mainly in silver and kept its books of account
v.
on the mercantile basis. In the course of the year of Commissioner of
account 1997 (Ramnavami) corresponding to 1941-42,
Income-tax,
582 bars of silver (some from the old stock in hand at
WestBeng(ll.
Calcutta and some purchased elsewhere during the
Patanjali
year) were sent to Bikaner where the partners resided,
Sastri o. J.
and their value at cost was credited in the books of the
firm.
In the assessment of the firm for the year 194243, it was alleged that the said silver bars had been
sold to the partners for their domestic use but the
Income-tax authorities held that the alleged sale was
not genuine and that the said silver bars still formed
part of the stock-in-trade of the firm at the close of the
previous year 1997, and they accordingly included in
the taxable profits a sum of Rs. 2,20,887 as the excess
arising from the valuation of the said582 bars at market
price on the closing day. They were valued at market
rate at which the rest of the closing stock at Calcutta
was valued in the books of the firm.
On appeal the Appellate Tribunal, on a consideration
of all the facts and circumstances of the case, recorded
its finding as follows :
"All these circumstances make it clear to us that
the action of the Income-tax authorities in treating
the stock of silver bars in Bikaner as part of the stockin-trade of the Calcutta business was amply justified.
The appellant on account of the panic in Calcutta had
to remove the valuable stock-in-trade to a safe place
in Bikaner just as many other Calcutta businessmen
did at that time. The partners of the firm thennoticed
the upward trend of the silver market, and decided to
take advantage of the camouflage afforded by the
entries in the books of account and the story of sale to
partners, so that the profit of the year of account
could be substantially reduced artificially."
The appeal was accordingly dismissed.
The application by the firm under section 66( 1) of the Act asking
29
214
SUPREME COURT R.EPORTS
[1954]
1963
for a reference to the High Court of six questions as
questions oflaw arisinb" out of the order of the Tribunal
Ohainrup
Sampatram
was also rejected.
v.
Thereupon the firm moved the High Court under
Oommissioner 0! section 66(2), and the court directed the Tribunal to
Inwme-tax
c
h
c ]]
·
t'
f 1
c
•
d · ·
w,.1 Bmgal. re1er t e io owmg ques Ion o aw ior Its ecis1on :
Whether in the circumstances of the case and on a
Patanjali
true construction of section 4 (1) (b) and section 14 (2)
Sa.irriO.J,
(c) of the Indian Income-tax Act, the sum of
Rs. 2,20,887 was in Jaw assessable to tax ?
The reference was heard by Chakravartti and Das
Gupta JJ., who answered the question in the
affirmative.
The firm being admittedly resident and ordinarily
resident within the meaning of sections 4-A and 4-B
in what was then known as British India, its total
income would include also income accruing or arising
to it without British India under section 4 (1) (b) (ii).
The firm, however, claimed exemption in respect of
the said sum under section 14(2)(0) which provided that
the tax shall not be payable by an assessee in respect
of any income, profits or gains accruing or arising to
him within an Indian State. It was contended that
even on the finding of the Income-tax authorities that
the silver bars in question formed part of the stock-intrade of the business at Calcutta and their removal to
Bikaner had been effected only for reasons of security,
the said bars having remained there during the rest of
the accounting year, their value at the market rate at
the close of the year being an increment to the goods
at Bikaner, the profit accrued at Bikaner (then an
Indian State), with the result that it was exempted
under section 14 (2) (c).
The High Court rejected this contention on the
ground that the "notional profit " represented by the
appreciation in value of the stock-in-trade "emerges
out of the valuation and only when it so emerges it
arises or accrues. The source of the profit is thus the
valuation, and its situs is where the valuation is made.
What is valued is the firm's business at the site of the
'
•
s.c::R.
SUPREME COURi; REPORTS
215
firm and all the stock-in-trade of the firm is neces1953
sarily drawn into the valuation wherever they may be
Chainrup
physically situated. The profit which is the result of
Sampatram
the stock valuation of a business is thus sui generis, a
v.
type by itself, to which the ordinary notions of a Commiuioner of
physical accrual will not apply. It comes into existIncome-tax,
--'
ence when the valuation is made and since it arises
West Bengal.
out of the valuation, it arises, in respect of the whole
Patanjali
stock-in-trade, at the site of the firm whose stock-insa.tri c. J,
trade is being valued irrespective of where parts of the
stock-in-trade may be."
While we agree with the conclusion that no part of
the profits of the firm in the accounting year can be
said to have accrued or arisen at Bikaner, the reason-
. ing by which the learned Judges arrived at that conclusion seems to us, with all respect, to proceed on a
misconception. It is wrong to assume that the valuation of the closing stock at market rate has, for its
object, the bringing into charge any appreciation in
the value of such stock. The true purpose of crediting ·
the value of unsold stock is to balance the cost of
those goods entered on the other side of the account
at the" time of their purchase, so that the cancelling
out of the entries relating to the same stock from both
sides of the account would leave only the transactions
on which there have been actual sales in the course of
the year showing the profit or loss actually realised on
the yeM"s trading. As pointed out in paragraph 8 of
the Report of the Committee on Financial Risks
attaching to the holding of Trading Stocks, 1919, "As
the entry for stock which appears in a trading
account is merely intended to cancel the charge for the
goods purchased which have not been sold, it should
necessarily represent the cost of the goods. If it is
more or less than the cost, then the effect is to state
the profit on the goods which actually have been sold
at the incorrect figure ...... From this rigid doctrine one
exception is very generally recognised on prudential
grounds and is now fully sanctioned by custom, viz.,
the adoption of matket . value at the date of making
up accounts, if that value is less than cost. It is of
216
SUPREME COUR'r REPOR'i'S
[1954]
1953
course an anticipation of the loss that may be made
on those goods in the following year, and may even
Ohainrup
a
.
Sampatram
have the euect, If prices rise again, of attributing to
v.
the following year's results a greater amount of profit
Oommiesioner of ,than the difference between the actual sale price and
Income-tax,
,the actual cost price of the goods in question" (extractWest Bengal. ed in paragraph 281 of the Report of the Committee
Patanjali
on the Taxation of Trading Profits presented to British
Saetri Q, J,
,Parliament in April, 1951 ).
While anticipated loss is
thus taken into account, anticipated profit in the
shape of appreciated value of the closing stock is not
brought into the account, as no prudent trader would
care to show increased profit before its actual realisation.
This is the theory underlying the rule that the
closing stock is to be valued at cost or market price
whichever is the lower, and it is now generally accepted as an established rule of commercial practice and
accountancy. As profits for income-tax purposes are
to be computed in conformity with the ordinary prin-
, ciples of commercial accounting, unless, of course, such
principles have been superseded or modified by legislative enactments, unrealised profits in the shape of
appreciated value of goods remaining unsold at the end
of an accounting year and carried over to the follow -
ing year's account in a business that is continuing are
not brought into the charge as a matter of practice,
though, as already stated, loss due to a fall in price
below cost is allowed even if such loss has not been
actually realised.
As truly observed by one of the
learned Judges in Whinister & Co. v. Commissioners of
Inland Revenue('), "Under this law (Revenue law) the
profits are the profits realised in the course of the year.
What seems an exception is recognised where a trader
purchased and still holds goods or stocks which have
fallen in value. No loss has been realised. Loss may
not occur. , Nevertheless, at the close of the year he
is permitted to treat these goods or stocks as of their
market value."
,
, An illustration of the rule in its practical working is
-to be found in the case of the Commissioner of Income·
tax, Madras v. Chengalvaraya Chetti('). In 1921 the
(t) ;iz Tax Cas. 8131 827.
'
I i
S.C.R.
SUPREME COURT REPORTS
217
assessee purchased a large stock of piece-goods at
19.sa
Rs. 13-8 a piece.
At the end of the year the market
value fell to Rs. 6 a piece, and he made out a loss by
8~~~:;;:,~,
valuing the whole stock at the market rate, including
v.
the unsold pieces in hand at the end of the year. The Commissioner of
loss was allowed in his assessment to income-tax. Jn
Income-tax,
the following year ( 1922), however, he entered the same
West Bengal.
unsold goods as opening stock at the cost price of
Patanjali
Rs. 13-8. Some of those pieces remained unsold at the
Sastri c. J.
end of 1922 also and he credited their value at Rs. 8-8
a piece, the market rate then prevailing, and showed
a loss on the year's trading. The Income-tax authorities refused to allow the loss thus calculated, and
assessed him as having made a profit on the footing
that the opening stock of 1922 should have been
valued at Rs. 6 a piece and the unsold pieces at Rs. 8-8
a piece. The assessment was upheld as properly made,
though, it will be seen, the transactions of 1922, or
even of the two years taken together, ended actually
in a loss.
Thus, while the valuation of the unsold
stock at the end of each year at market rate which
was less than cost was accepted,. the valuation of the
unsold goods carried over as opening stock of 1922 at
Rs. 6 a piece consistently with their valuation as the
closing stock of 1921 was insisted upon in order to
rectify the distorted picture of the trading results of
1921 which were not correctly reflected in the accounts
by reason of the assessee having adopted the lower
market rate instead of cost as the value of the Closing
stock in 1921. If the market had risen to, say, Rs. 15
instead of to Rs. 8-8 a piece at the end of 1922, then,
on the principles indicated above, it would have been
open to the assessee to value the closing stock at cost
(Rs. 13-8), and the Income-tax authorities. could not
have claimed to bring into the assessment the appreciated value of the unsold goods. It will thus be seen
that no question of charging the appreciated value of
closing stock as " notional profits " can really arise.
In the present case, although it would appear that the
cost price of part of the silver despatched to Bikaner
was less than the market price at the end of the year,
the reference did not raise any question regarding the
218
SUPREME COURT REPORTS
[1954]
basis on which the amount in dispute, viz., Rs. 2,20,887,
was arrived at. On the other hand, the question
Chainrttp
Sampatmm
referred assumed that the said sum was correctly
1953
v.
computed mid put in issue only its assessability in law
Oommi,,io11cr of on a true construction of section 4( l) (b) and section
Incmnc-lax,
14(2) ( c) of the Act.
Wo.t Bengal.
A
.
. .
.
·
h' k ]
fi
gam, It IS a mrnconcept10n to t m t 1at any pro t
Patanjali
"arises out of the valitation of the closing stock" and
Sa•tri a. J.
the situs of its arising or accrual is where the valuation
is made.
As already stated, valuation of unsold stock
at the close of an accounting period is a necessary part
of the process of determining the trading results of
that period, and can in no sense be regarded as the
" source" of such profits.
Nor can the place where
such valuation is made be regarded as the "situs of
their accrual ". The source of the profits and gains of
a business is indubitably the business, and the place
of their accrual is where the business is carried on. As
such profits can be correctly ascertained according to
the method adopted by an assessee only after bringing
into the trading account his closi>Ig stock wherever it
may exist, the whole of the profits must be taken to
accrue or arise at the place of carrying on the business.
On the finding of the Income-tax authorities that the
582 bars of silver lying at Bikaner had not been really
sold but remained part of the unsold stock of the firm's
business at the end of the accounting year, the whole
of the profits of that year must be taken to have
accrued or arisen at Calcutta where the business was
carried on, no part of that business having admittedly
been transacted at Bikaner.
We agree with the High Court that the question
referred should be answered in the affirmative though
on different grounds. The appeal is accordingly dismissed with costs.
Appeal dis·m·issed.
Agent for the appellant: P. K. 1v1'ukhe1ji.
Agent for the respondent: G. 11. Rajadhyaksha.
/·
-1
)
'"